Peer to Peer Lending-Investing, Borrowing & Safety in India

During our grandparents’ time, it was normal to lend money from relatives and neighbours. Though there was no formal platform but it was peer to peer lending in those days.There were tough days where one would find it difficult to make  ends meet and the only option you would have was taking a loan from your relative or neighbour. This also came with a lot of advantages. It was quick; all you had to do was ask them, and they would oblige. Also, repayment was easy.  No ECS failure; no cash balance being below the minimum or anything else. You take the money when you need it and repay when you have it.

Then came the banking system in the country. With the influx of banks into our financial services system, it became normal for the trend to shift from informal sectors to the formal sector. Relatives, friends and others were part of the informal sector whereas the new age banks were the formal sector. People chose to move from the informal sector to the formal sector mainly because of  the advantages it had in store.

But what were the disadvantages? Not everybody were entitled to get a  loan. Loans from banks were given only to the individuals with the best credit ratings. They needed to have a proven record of honest repayment. And this was slightly more difficult in rural India where records of any type were simply not available.

The situation largely improved as the State moved towards privatizing banks, keeping only a few select banks as scheduled banks. Even today, you will see the only bank present in most villages in India would be the State Bank of India or PSU banks. As scheduled banks widened their scope, most of the insecurities related to banks came down and people started accepting them as a normal middleman.

This continued in practice till 2008 when  the recession struck us. Banks had given too much credit, and as defaults increased, banks fell. The respect that banks had gathered over decades fell away in a matter of years.  Banks on the other hand  started heavily investigating every borrower and depositor. There were strict KYC (Know Your Customer) norms established and customers were only given loans or advances if they were able to prove their credit worthiness.

A normal man could not get a loan that easily anymore. Those who had property or a business to back their loans survived. However,  others found it extremely difficult to get loans from the banks. Those who had small businesses could not get credit anymore. There was, thus a gap created in this sector. There was definitely a demand,but where was the supply going to come from?

This came in the form of peer to peer lending.

What is peer to peer lending in India?

Let us first understand what a peer to peer lending system means.

Peer to Peer lending essentially means those who have excess cash lend their money to those who are in need cash. The interest rates are mutually determined by both the parties or the lending platform basis credit history of borrower.The communication happens through various peer to peer websites where the lender meets the borrower.

Peer to peer lending – Investing and Borrowing

The basic conditions for investing and borrowing in peer to peer lending are

• You should be a resident Indian who is 18 years old and have a bank account in India
• You should have have completed the KYC with a pan card of any other Govt Id like Aadhar Card, Voter Id.

Peer to peer lending platforms also do personal and professional verification in addition to checking your credit history.

What is the minimum and maximum amount that I can lend?

The minimum amount is different for different platforms. The maximum amount is Rs. 50000/- to a single borrower.

What is the maximum amount that I can borrow?

The maximum amount a person can borrow is Rs. 10 Lakhs across all the platforms.

How does peer to peer lending club work?

Peer to peer lending club is the an intermediary between the lender and borrower. Normally, Peer to peer lending club works on basis of fee. So,they charge fee for every transaction which takes place on their platform. Some platform ask for the registration fee and processing fee too.

Is  peer to peer lending safe?

There is an online borrower verification system where the borrower has to submit all his details. The same KYC norms that apply to the bank also apply here. This has to be regulated by the Reserve Bank of India (RBI). Once the lender verifies the borrower’s documents and is satisfied that these hold good, he would go ahead and lend his money.

Is peer to peer lending legal in India?

Very good question! There is nothing in the Indian law that says this is illegal. Most websites that host peer to peer lending are perfectly registered and function as a middleman in the whole process. This is to say, the websites and the processes are essentially not illegal. Though the industry for peer to peer lending is in its infant stages, it is expected to grow many folds as RBI establishes the final guidelines that need to be followed.

Yes, Peer to peer lending is legal in India.

Is peer to peer lending authorized by RBI?

It is important to know that RBI has only published a white paper and the expected guidelines are to be announced soon. According to the latest notification, dated 24th August 2017, of RBI peer to peer landing platforms will be treated as Non-Banking Financial Company(NBFCs)

Yes, RBI authorizes peer to peer lending platforms.

Also as per the RBI regulation, peer to peer landing platforms neither can give any credit guarantee nor credit enhancement.

RBI Notification : Read Here

Peer to peer lending advantages and disadvantages

What are the advantages of peer to peer lending?

• Anybody can get money. It means that anybody who does not get money from a bank will now be able to do the same through peer to peer lending.
• Higher returns. While a normal debt instrument only yield around 8% returns in the long run, peer to peer lending schemes can yield up to 36%.
• The borrower and lender can choose from whom to borrow and whom to lend to, respectively. This is important in India especially as we are seeing an increase in the number of bank defaults, irresponsible lending etc.
• It is also extremely convenient as the parties might get to know each other personally and have clauses in the agreement for late payments, penalties etc.This will ensure that there is no miscommunication or disagreements.

Now let us see what the disadvantages of peer to peer lending are

• Definitely. In most cases, other than the KYC that you would be doing, you will have no idea whom are you lending your money to. There is no credit rating bureau keeping a score of peer to peer defaults. It is extremely easy to take the money and run away.
• You will have huge delays in recovery. You might not be able to pull your money out at any point of time if at all there is an emergency.
• Lending platforms do not pay you the credit guarantee.

How does a peer to peer loan works?

Let us look at an example of how peer to peer loan works.

Mr. A needs some money urgently. He approaches various banks in the country and is denied loan due to the reason that he has a bad credit score. Therefore, he decides to approach a peer to peer lending platform online and puts up his request for Rupees 10 (Ten) lakhs in loan. Mr B who had an excess of ten lakhs in his account decides to lend it through the peer to peer platform. Mr A and Mr B connect on the same platform and exchange their contact details. Once the details are exchanged, they connect over a call to understand each other. If they are comfortable moving forward, they do the mandatory regulatory KYC checks and money is exchanged at a particular rate of interest.

Now who gains what?

How much money can you make from peer to peer lending – Investment Returns?

Mr A, who was not being able to secure a loan is now happy since he has gotten a loan at last. Similarly, Mr B, who would have normally gotten only 6% in fixed deposits is now  getting a handsome 15% thanks to the peer to peer lending system. The investment returns in this case are 15%. Mr. B in this case is making additional money upto 15%.

What if Mr A wants to prepay the loan? Can he do that? Definitely!

But in that case, who loses out?  The answer would be Mr B. Mr B would have got 15% for the entire tenure of the loan.  Unfortunately in this scenario, he is only getting 6% from  FD since  the loan has been prepaid by Mr. A.

What if Mr. B wants the money back immediately because of an emergency? Can he get it back? Suppose Mr. B had put the money in a fixed deposit instead of lending it through the peer to peer network. He would simply have broken the fixed deposit and taken the money back. Is that possible now? Nope!

So There are no fixed investment returns  from peer to peer lending.

Peer to peer lending sites in India

Here is a list of peer to peer lending sites in India

• Faircent
• Lendbox
• i2iFunding
• LenDenClub
• i-Lend
• Cashkumar
• OMLP2P

All these websites act as a medium for the potential lender to meet the potential borrower.

Which is the best peer to peer lending platform?

I am not really sure about which is best peer to peer lending platform because different platform offer different features.

In case of i2i, you can choose an option of 0%/25%/50%/75%/100% principle protection

Peer to peer lending  – Review

From the above scenario, it is evident that peer to peer lending is a huge opportunity for potential investors. Furthermore,with a limited downside risk and an unlimited upside risk, this will help stabilize the economy if at all the banking system fails.  If the Reserve Bank can step in and help mitigate these risks, there is no telling where peer to peer lending will head. As the underlying business itself, the concept is extremely fresh and could change the economy once and for all.

In conclusion, what is your experience, if any, on peer to peer lending platforms? Also what is your view on peer to peer lending platforms?